Non-Profits Archives - Page 28 of 41

Estate Planning Pitfall: You’re Not Making Direct Payments of Tuition and Medical Expenses

Tax Prep, Planning & Strategy|August 6, 2019

Now that the unified gift and estate tax exemption has jumped to $11.18 million in 2018, you may no longer have to worry about gift and estate taxes. On top of that, you can still use the annual gift tax exclusion of $15,000 per recipient in 2018.

In other words, you can give each recipient gifts valued up to $15,000 a year, thereby reducing the size of your taxable estate. For example, if you have three children and seven grandchildren, you can give each one $15,000, for a total of $150,000. If your spouse joins in the gifts, the tax-free total is doubled to $300,000. And, if you continue this pattern for five years, you’ll have reduced your taxable estate by $1.5 million gift tax free.

But there are no guarantees that estate tax laws won’t be revised in the future or that your accumulated assets won’t eventually exceed the available exemption. Investigate other tax-saving possibilities.

Notably, be aware of this unique tax break: If you pay medical expenses on behalf of someone directly to a health care provider, those payments are exempt from gift tax above and beyond any amount covered by the annual gift tax exclusion. The same is true for paying the tuition expenses of a student directly to the school. For example, if you give your granddaughter $15,000 in 2018 and then pay her $35,000 tuition bill at an elite private college, the entire $50,000 is sheltered from gift tax. But remember that the gift must be made directly to the educational institution (or health care provider). You can’t use your granddaughter as a go-between.

Associations: Avoid certain activities to preserve tax-exempt status

Tax Prep, Planning & Strategy|August 6, 2019

Nonprofit trade associations, or 501(c)(6) organizations, exist to promote their members’ common interests and improve business conditions or “one or more lines of interest.” Whether the association is a local chamber of commerce, a real estate board or a large professional group, associations’ tax-exempt status is contingent on their sponsoring certain types of activities — and avoiding others. When they fail to do so, the IRS may take action.

Misinterpreting terms

Typically, associations get into trouble when they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, they might provide customized sales training for only some of their members. But associations don’t qualify for tax-exempt status if they exist only to perform services for individual members.

Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby generally don’t qualify for 501(c)(6) status.

Differentiating between activities

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, it’s acceptable to attempt to influence legislation relating to the common business interests of your members. You can also test and certify products and establish industry standards; publish statistics on industry conditions to promote your members’ line of business; and research effective business practices and share that information with your members.

But you should limit activities if they benefit specific members rather than the industry or profession as a whole. These might include:

Selling advertising in member publications,
Facilitating the purchase of supplies for members,
Providing workers’ compensation insurance to members.

Your association’s “primary purpose” is key. Most 501(c)(6) groups perform some activities that don’t primarily serve common business interests. But these activities generally should be limited in scope and number.

Avoiding UBIT

Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.

Stop and reassess if you’re performing more services, or more substantial ones, for individual members. Instead, you might form a separate for-profit organization to offer those services.

Keeping your focus

The IRS is on the lookout for 501(c)(6) associations that don’t promote common business interests. If yours doesn’t, it may be time to review and revise your offerings. Contact us for help.

Hire your children this summer: Everyone wins

Tax Prep, Planning & Strategy|August 4, 2019

If you’re a business owner and you hire your children (or grandchildren) this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, save for college and learn how to manage money. And you may be able to:

Shift your high-taxed income into tax-free or low-taxed income,
Realize payroll tax savings (depending on the child’s age and how your business is organized), and
Enable retirement plan contributions for the children.

It must be a real job

When you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

For example, let’s say a business owner operates as a sole proprietor and is in the 37% tax bracket. He hires his 16-year-old son to help with office work on a full-time basis during the summer and part-time into the fall. The son earns $10,000 during 2019 and doesn’t have any other earnings.

The business owner saves $3,700 (37% of $10,000) in income taxes at no tax cost to his son, who can use his 2019 $12,200 standard deduction to completely shelter his earnings.

The family’s taxes are cut even if the son’s earnings exceed his or her standard deduction. The reason is that the unsheltered earnings will be taxed to the son beginning at a rate of 10%, instead of being taxed at his father’s higher rate.

How payroll taxes might be saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.

Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners.

Start saving for retirement early

Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA. For the 2018 tax year, a working child can contribute the lesser of his or her earned income, or $6,000 to an IRA or a Roth.

Raising tax-smart children

As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. If you have any questions about how these rules apply to your situation, don’t hesitate to contact us.

Congress acts to reform the IRS, enhance taxpayer protections

Tax Prep, Planning & Strategy|August 1, 2019

The U.S. Senate has passed, and President Trump is expected to sign into law, a broad package of reforms aimed at the IRS. Among other things, the Taxpayer First Act contains several new protections for taxpayers, along with provisions intended to improve the IRS’s customer service.

Stronger safeguards against identity theft

Several of the bill’s provisions address tax-related identity theft. For example, the bill generally requires the IRS to notify a taxpayer as soon as practicable when it suspects or confirms an unauthorized use of the individual’s identity. The IRS also must:

Provide the taxpayer instructions on how to file a report with law enforcement on the unauthorized use,
Identify any steps the individual should take to permit law enforcement to access his or her personal information during the investigation,
Provide information regarding the actions the taxpayer can take to protect him- or herself from harm, and
Offer identity protection measures, such as the use of an “identity protection personal identification number” (IP PIN).

The bill also requires the IRS to establish a program within five years that allows all taxpayers to request IP PINs to better secure their identity when filing their tax returns. This protection currently is available only to victims of tax-related identity theft.

The IRS must provide a suspected victim with additional notifications regarding whether it has initiated an investigation into the unauthorized use and whether the investigation has substantiated such unauthorized use. It also must notify the individual of whether any action has been taken against someone relating to the unauthorized use or whether any referral for criminal prosecution has been made.

And the IRS must ensure that victims of tax-related identity theft have a single point of contact at the agency throughout the processing of their cases. That contact must track the taxpayer’s case to completion and coordinate with other IRS employees to resolve the taxpayer’s issues as quickly as possible.

Greater appeals rights

The Taxpayer First Act codifies into law the IRS’s already-existing, independent Office of Appeals. It also expands taxpayers’ rights of appeal regarding tax matters.

For example, under the law, the IRS must provide certain taxpayers who request a conference with the Office of Appeals with access to the nonprivileged portions of the case file on the disputed issues no later than 10 days before the scheduled conference date. Currently, taxpayers must file a Freedom of Information Act request to gain access to their case files.

The resolution process available through the appeals office generally is available to all taxpayers. If a taxpayer’s request to appeal an IRS notice of deficiency is denied, the IRS must give the taxpayer a written notice with a detailed description of the facts involved, the basis for the denial and a detailed explanation of how the basis applies to the facts. The notice also must describe the procedures for protesting the denial.

Customer service improvements

The bill gives the IRS one year to develop and submit to Congress a comprehensive customer service strategy. The strategy must include a plan to extend assistance to taxpayers that’s secure and designed to meet reasonable taxpayer expectations. The plan must adopt appropriate customer service best practices from the private sector, including online services, telephone callback services and training of customer service employees.

Separately, the bill requires the IRS to supply helpful information to taxpayers who are on hold during a telephone call to any IRS help line. That information includes common tax scams, where and how to report tax scams, and additional advice on how taxpayers can protect themselves from identity theft and tax crimes.

Additional provisions

The Taxpayer First Act tackles many other areas, including:

Structuring. The bill establishes new protections from IRS enforcement abuses of so-called “structuring laws.” Those laws let the agency seize taxpayer assets when a taxpayer appeared to make bank deposits in amounts just under the $10,000 trigger for bank reporting requirements.

Whistleblower reforms. The bill permits the IRS to disclose to a whistleblower tax return information related to the investigation of any taxpayer about whom the whistleblower has provided information (to the extent necessary to obtain information that isn’t otherwise reasonably available). It also mandates certain updates to whistleblowers on investigations and adds antiretaliation provisions.

Electronic filing. The IRS generally must eventually require individuals filing 10 or more returns — down significantly from the current 250-return threshold — to file electronically. The lower threshold will be phased in, falling to 100 returns for 2021 and 10 returns in 2022. Special rules apply to partnerships.

And that’s not all

The far-reaching bill will affect a variety of other areas, such as cybersecurity, innocent spouse relief, private debt collection and misdirected tax refund deposits. We’ll keep you abreast of these and other relevant tax developments.

College financing may be an integral part of your estate plan

Tax Prep, Planning & Strategy|July 30, 2019

The staggering cost of college makes it critical for families to plan carefully for this major expense, and in many cases grandparents want to play a role. As you examine the many financing options for your grandchildren, be sure to consider their impact on your estate plan.
Make direct payments

A simple, but effective, technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the college, they avoid gift and generation-skipping transfer (GST) tax without using up any of your $11.4 million gift or GST tax exemptions or your $15,000 annual gift tax exclusion.

A disadvantage of direct payments is that, if your grandchild is young, you have to wait until the student has tuition bills to pay. So there’s a risk that you’ll die before the funds are removed from your estate.

Draft a grantor trust

Trusts offer several important benefits. For example, a trust can be established for one grandchild or for multiple beneficiaries, and assets contributed to one, together with future appreciation, are removed from your taxable estate. In addition, the funds can be used for college expenses or for other purposes. Also, if the trust is structured as a “grantor trust” for income tax purposes, its income will be taxable to you, allowing the assets to grow tax-free for the benefit of the beneficiaries.

On the downside, for financial aid purposes a trust is considered the child’s asset, potentially reducing or eliminating the amount of aid available to him or her. So keep this in mind if your grandchild is hoping to qualify for financial aid.

Explore all of your options

Other college financing options include Sec. 529 college savings and prepaid tuition plans, savings bonds, retirement plan loans, Coverdell Education Savings Accounts, and various other tax-advantaged accounts. If you’d like to learn more about your options to help fund your grandchild’s education expenses, please contact us.
© 2019

2019 Tax Calendar

Tax Prep, Planning & Strategy|July 25, 2019

To help you make sure you don’t miss any important 2019 deadlines, we’ve provided this summary of when various tax-related forms, payments and other actions are due. Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

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Deducting Charitable Gifts Depends on a Variety of Factors

Tax Prep, Planning & Strategy|July 23, 2019

Whether you’re planning to claim charitable deductions on your 2018 return or make donations for 2019, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.

What you give

Among the biggest factors affecting your deduction is what you give. For example:

Cash or ordinary-income property. You may deduct the amount of gifts made by check, credit card or payroll deduction. For stocks and bonds held one year or less, inventory, and property subject to depreciation recapture, you generally may deduct only the lesser of fair market value or your tax basis.

Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.

Tangible personal property. Your deduction depends on the situation. If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis. But if the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.

Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.

Use of property or provision of services. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift. When providing services, you may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

Other factors

First, you’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable deductions may be reduced if they exceed certain income-based limits.

In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.

Planning ahead

For 2018 through 2025, the Tax Cuts and Jobs Act nearly doubles the standard deduction ― plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax.

You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year.

The years ahead

Your charitable giving strategy may need to change in light of tax law reform or other factors. Let us know if you have questions about how much you can deduct on your 2018 return or what’s best to do in the years ahead.

Why you should run your nonprofit like a business

Accounting & Assurance|July 23, 2019

It’s a well-known truism in the corporate world: Organizations that don’t evolve run the risk of becoming obsolete. But instead of anticipating and reacting to market demands like their for-profit counterparts, many not-for-profits hold on to old ideas about how their organizations should be run. Here are a few things your nonprofit can learn from the business world.

Thinking strategically

The strategic plan — a map of near- and long-term goals and how to reach them — lies at the core of most for-profit companies. If your nonprofit doesn’t have a strategic plan or has been lax about revisiting and revising an existing plan, this should be a top priority.

Although the scope of your plan will be specific to the size and nature of your organization, basic principles apply to most. For example, you should set objectives for several time periods, such as one year, five years and 10 years out. Pay particular attention to each strategic goal’s return on investment. For example, consider the resources required to implement a new contact database relative to the time and money you’ll save in the future.

Spending differently

You probably already develop an annual budget, but how closely does it follow your strategic plan? For-profit businesses use budgets to support strategic priorities, putting greater resources behind higher priority projects.

Businesses also routinely carry debt on their balance sheets in the belief that it takes money to make money. Nonprofits, by contrast, typically avoid operating deficits. Unfortunately, it’s possible to operate so lean that you no longer meet your mission. Applying for a loan or even creating a for-profit subsidiary could provide your nonprofit with the funds to grow. Building up your endowment also may help provide the discretionary cash essential to pursue strategic opportunities.

Promoting transparency

Although nonprofits must disclose financial, operational and governance-related information on their Form 990s, public companies subject to the Sarbanes-Oxley Act and other regulations are held to higher standards. Consider going the extra mile to promote transparency.

If you don’t already, engage an outside expert to perform annual audits, and make your audited financial statements available upon request. Outside audits help assure stakeholders that your financial data is accurate and that you’re following correct accounting practices and internal controls.

We can help with your audit needs and assist you in adopting for-profit business practices that make sense given your organization’s needs. Contact us.

How entrepreneurs must treat expenses on their tax returns

Tax Prep, Planning & Strategy|July 21, 2019

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

When starting or planning a new enterprise, keep these factors in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. We don’t need to tell you that $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

Start-up expenses generally include all expenses that are incurred to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

Is your nonprofit monitoring the measures that matter?

Accounting & Assurance|July 18, 2019

Do you want to control costs and improve delivery of your not-for-profit’s programs and services? It may not be as difficult as you think. First, you need to know how much of your nonprofit’s expenditures go toward programs, as opposed to administrative and fundraising costs. Then you must determine how much you need to fund your budget and weather temporary cash crunches.

4 key numbers

These key ratios can help your organization measure and monitor efficiency:

Percentage spent on program activities. This ratio offers insights into how much of your total budget is used to provide direct services. To calculate this measure, divide your total program service expenses by total expenses. Many watchdog groups are satisfied with 65%.

Percentage spent on fundraising. To calculate this number, divide total fundraising expenses by contributions. The standard benchmark for fundraising and admin expenses is 35%.

Current ratio. This measure represents your nonprofit’s ability to pay its bills. It’s worth monitoring because it provides a snapshot of financial conditions at any given time. To calculate, divide current assets by current liabilities. Generally, this ratio shouldn’t be less than 1:1.

Reserve ratio.Is your organization able to sustain programs and services during temporary revenue and expense fluctuations? The key is having sufficient expendable net assets and related cash or short-term securities.

To calculate the reserve ratio, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365). For most nonprofits, this number should be between three and six months. Base your target on the nature of your operations, your program commitments and the predictability of funding sources.

Orient toward outcomes

Looking at the right numbers is only the start. To ensure you’re achieving your mission cost-effectively, make sure everyone in your organization is “outcome” focused. This means that you focus on results that relate directly to your mission. Contact us for help calculating financial ratios and using them to evaluate outcomes.

Estate Planning Pitfall: You’re Not Making Direct Payments of Tuition and Medical Expenses

Associations: Avoid certain activities to preserve tax-exempt status

Hire your children this summer: Everyone wins

Congress acts to reform the IRS, enhance taxpayer protections

College financing may be an integral part of your estate plan

2019 Tax Calendar

Deducting Charitable Gifts Depends on a Variety of Factors

Why you should run your nonprofit like a business

How entrepreneurs must treat expenses on their tax returns

Is your nonprofit monitoring the measures that matter?

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